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Neglected Formalities in the Mortgage Assignment Law Review

Neglected Formalities in the Mortgage Assignment Law Review

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Published by: Carrieonic on Sep 30, 2011
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253
NEGLECTED FORMALITIES IN THE MORTGAGE ASSIGNMENTPROCESS AND THE RESULTING EFFECTS ON RESIDENTIALFORECLOSURES
*
 
I. I
NTRODUCTION
 At the height of the housing boom in 2004, homeownership reached a recordhigh of 69.2%.
1
Just eight years later, 8.1 million homes—or sixteen percent of allmortgages—are expected to be in foreclosure.
2
The mortgage securitizations andassignments, which allowed Wall Street to push America’s housing market towards the peak reached in 2004,
3
were often hastily completed and are nowcreating problems for the financial institutions attempting to bring those 8.1million foreclosures. These foreclosure problems first appeared in the courts, but have since garnered national attention as a result of the widespread use of questionable evidence to establish the elements of a foreclosure.In 2007, in the U.S. District Court for the Northern District of Ohio, JudgeBoyko dismissed fourteen foreclosure cases because none of the plaintiffspresented the notes associated with the mortgages or established that they hadstanding to foreclose on those mortgages.
4
Since then, numerous state and federalcourts have dealt with the problems created by the improper, untimely, or non-existent assignments associated with securitized mortgages.
5
The level of neglect for the assignment formalities falls on a spectrum. Untimely assignments and
* David R. Greenberg, J.D. Candidate, Temple University Beasley School of Law, 2011. I would like tothank the staff and editors of 
Temple Law Review 
, especially Michael Connett and Jim Stinsman, for alltheir hard work. I would also like to thank my family and friends for their support and encouragement during the writing process. Finally, I would like to thank Professor Woodward for his guidance duringthis process. Without his infectious excitement for this topic and his honest and insightful critiques, thisComment never would have reached this stage.1.J
AMES
R.
 
B
ARTH ET AL
.,
 
M
ILKEN
I
NST
.,
 
A
 
S
HORT
H
ISTORY OF THE
S
UBPRIME
M
ORTGAGE
M
ARKET
M
ELTDOWN
 1 (2008),
available at 
http://www.milkeninstitute.org/publications/publications.taf?function=detail&ID=38801038&cat=Papers (follow "view PDF" hyperlink; creation of free account required).2.R
OD
D
UBITSKY ET AL
.,
 
C
REDIT
S
UISSE
,
 
F
ORECLOSURE
U
PDATE
:
 
O
VER
8
 
M
ILLION
F
ORECLOSURES
E
XPECTED
1(2008),
available at 
http://www.chapa.org/pdf/ForeclosureUpdateCreditSuisse.pdf.3.See
infra
Part II.A.2 and accompanying text for a discussion of how securitization led to thehousing boom.4.
See generally 
 
In re
Foreclosure Cases (
Boyko Foreclosure Cases
), Nos. 1:07CV2282, 07CV2532,07CV2560, 07CV2602, 07CV2631, 07CV2638, 07CV2681, 07CV2695, 07CV2920, 07CV2930, 07CV2949,07CV2950, 07CV3000, 07CV3029, 2007 WL 3232430 (N.D. Ohio Oct. 31, 2007) (denying standingbecause—although plaintiffs in question were presumably holders of securitized notes and mortgages—subject notes and mortgages still identified original lending institutions as holders without any evidenceof assignment to plaintiffs or otherwise mentioning plaintiffs in chains of title or interest).5.
See
Samuel L. Bufford & R. Glen Ayers, Am. Bankr. Inst., Where’s the Note, Who’s the Holder:Enforcement of Promissory Note Secured by Real Estate 5–8 (Apr. 3, 2009) (unpublished report),http://www.ce9.uscourts.gov/jc2009/references/bjep/UCC_Paper_L0325086.PDF
 
(presenting list of recent cases dealing with foreclosure problem which served as starting point for this Comment’sresearch).
 
254
TEMPLE LAW REVIEW 
[Vol. 83
poorly documented assignments fall relatively low on the spectrum, and courtsare split on the effect of these less severe forms of neglected formalities.
6
 However, as the financial institutions’ neglect for the traditional assignment formalities increases in severity, all courts should begin to recognize that foreclosures based on those severely neglected assignments must be prevented.In deciding if and when problem mortgages can be foreclosed upon, courtshave wrestled with several factors. In federal courts, the main question has beenabout the federal standing doctrine.
7
In state courts, there have been similarstanding analyses, but through the lens of state law.
8
With the recent revelationsregarding the use of improper evidence and "robo-signers" to prove the elementsof a foreclosure, all courts should be increasingly concerned with the evidenceused to establish a bank’s right to foreclose.
9
 Several state and federal courts have expressly acknowledged two publicpolicies at play when making their decisions.
10
These two constant andcountervailing policies are (1) the interest in protecting families and communitiesby not allowing financial institutions to foreclose on homes without the legalauthority to do so, and (2) preventing further harm to an economy dependent onthe mortgage industry’s ability to recoup debt.
11
While several courts haveexpressly considered the two interests above, other courts have disregarded thesepolicies either by allowing foreclosures to go through with inadequatedocumentation or by wiping clean the entire debt on a mortgage when no proof of assignment was presented at the initial filing.This Comment argues that when disregard for the assignment process risesto the level of bringing a foreclosure without a legal assignment, on behalf of anundisclosed third party, or with inadequate evidence, standing should never beafforded to the foreclosing financial institution regardless of the court, governingstate law, or countervailing public policies.
12
To ensure that banks do not foreclose when they are unable to adequately prove their standing to do so, whileat the same time preventing further damage to the global economy, this Comment concludes that all courts should consider the relevant public policies and that cases reaching the higher levels of neglect should always be dismissed without prejudice or, in bankruptcy, claims should always be given leave to amend.
6.See
infra
Part III.A.2 for a discussion of the consequences of an untimely or unprovenassignment.7.
See, e.g.
,
Boyko
 
Foreclosure Cases
, 2007 WL 3232430.8.
See, e.g.
, U.S. Bank N.A. v. Mallory, 982 A.2d 986, 993–94 (Pa. Super. Ct. 2009).9.
See
Gretchen Morgenson,
Banks' 
 
Flawed Paperwork Throws Some Foreclosures into Chaos
, N.Y.T
IMES
, Oct. 4, 2010, at A1 (explaining how Bank of America, GMAC Mortgage, and JP Morgan Chasevoluntarily halted foreclosures after realizing that a significant percentage of their foreclosuredocuments had been improperly prepared, signed, and filed).
 
10.
See, e.g.
,
Boyko
 
Foreclosure Cases
, 2007 WL 3232430, at *3 n.3 (stating court's feelings on howbanking entities were taking advantage of homeowners);
In
 
re
Hwang, 396 B.R. 757, 765 (Bankr. C.D.Cal. 2008) (considering both markets' reliance on foreclosures and need to prevent banks from usingneglectful assignments to foreclose),
rev’d 
, 438 B.R. 661 (C.D. Cal. 2010).11.See
infra
Part III.B for a further discussion of these competing policies.12.See
infra
Part III.A.3 and accompanying text for a discussion of how courts deal with severedeficiencies in assignment formalities.
 
2010]
NEGLECTED FORMALITIES IN MORTGAGE ASSIGNMENTS 
255
To begin, Part II.A lays out some of the significant changes in the mortgageindustry which contributed to the financial crisis. Parts II.B and II.C then discussmortgage assignment requirements and departures from the assignment recording process. To lay a foundation for the judicial reaction to the foreclosurecrisis, Parts II.C, II.D, and II.E detail the emergence of the foreclosure crisis, thedifferent types of foreclosure, the role of bankruptcy in foreclosure, theemergence of bank reliance on questionable evidence, and the standingrequirements. Part II.F then presents several ways courts have reacted to theforeclosure crisis and the neglected formalities in mortgage assignments.Part III.A discusses how federal courts should apply the standing doctrine tomortgage assignments. Finally, Part III.B places recent cases in the context of thetwo opposing public policies: (1) protecting consumers from improperforeclosures based on neglected assignments and questionable evidence and(2) preventing further damage to the economy. Part III.B concludes that theindividual consumer and the economy as a whole will best be protected if courtsalways consider these two policies and (1) strictly hold banks accountable to thestanding requirements, while (2) giving banks an opportunity to correct mistakesin foreclosure filings through dismissals without prejudice or throughopportunities to amend proofs of claim in bankruptcy.
 
This proposal will ensurethat banks adequately prove all elements of a foreclosure, but will give banks asecond chance to prove those elements if a bank's first filing was inadequate.II. O
VERVIEW
 In order to effectively analyze the cases dealing with these issues—caseswhich began to appear in 2007 in the Northern District of Ohio
13
—it is important to understand the causes and scope of the dramatic increase in residentialforeclosures. The increase in subprime mortgages, the securitization of thesemortgages, and the foreclosure of significant numbers of these mortgages allcontributed to the current financial crisis.
14
 
 A. Recent Changes in the Mortgage Industry 
1. Subprime LendingBetween 1994 and 2006, subprime mortgages grew from five percent to overtwenty percent of all new mortgages.
15
Subprime mortgages target individualswho do not qualify for credit in the prime market.
16
While the primary reason an
13.
Boyko
 
Foreclosure Cases
, Nos. 1:07CV2282, 07CV2532, 07CV2560, 07CV2602, 07CV2631,07CV2638, 07CV2681, 07CV2695, 07CV2920, 07CV2930, 07CV2949, 07CV2950, 07CV3000, 07CV3029,2007 WL 3232430 (N.D. Ohio Oct. 31, 2007).14.Gerald Korngold,
Legal and Policy Choices in the Aftermath of the Subprime and MortgageFinancing Crisis
, 60 S.C. L. Rev. 727, 728–31 (2009) (detailing causes of financial crisis).15.B
ARTH
,
supra
note 1, at 3.16.T
REASURY
T
ASK
F
ORCE ON
P
REDATORY
L
ENDING
,
 
D
EP
T OF
H
OUSING
&
 
U
RBAN
D
EV
.,
 
C
URBING
P
REDATORY
H
OME
M
ORTGAGE
L
ENDING
27 (2000),
available at 
http://www.huduser.org/publications/pdf/treasrpt.pdf.

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